How Many Accountants Does It Take to Change an Industry?

The chaos in accounting today is no joke. But now may be the time to find accountants with upgraded skills, lower prices, and customized services

To get a sense of the scope of the changes that have been whipsawing the roughly $40-billion accounting industry in the United States, listen to John Cicco Jr., whose marketing-research and consulting firm is based in Murrysville, Pa. Since 1988 Cicco has been surveying the attitudes of a group of small-business owners--most of them with fewer than 20 employees--that are clients of large corporations. Although he tracks their attitudes toward 12 major industries in all, the accounting profession has been a standout in his survey--because of its bad ratings.

"I've always asked my respondents to name any large companies within these 12 industries that seem particularly responsive to small business," Cicco explains. "When we did our first survey, the accounting industry ranked first, with 45.8% of the respondents citing one or more of the big firms." No longer.

"Accountants have been vying for the bottom of the list for the last couple of years now," he notes. Ironically, the decline comes during a decade when most large accounting firms targeted entrepreneurial customers as being crucial to their growth.

Sagging popularity ratings are only part of the problem for many of today's accountants. The industry is roiled by new competition, spiraling capital costs, declining profit margins, and an increase in lawsuits. Arthur Bowman, who tracks the industry with his monthly newsletter, Bowman's Accounting Report, notes, "Over the past 20 years, it seems as though accountants have been in a period of constant change. But the scope and speed of those changes just keep accelerating."

Until fairly recently, traditional accounting firms monopolized two essential business services: auditing and tax work. Then the late 1970s brought the industry's first real waves of competition, when state accounting boards (the regulatory bodies that govern the industry) began permitting accountants to advertise their services. That competition began pushing prices down on those bread-and-butter lines. The pressure on prices continued during the 1980s, with the large firms aggressively wooing one another's clients, often with lower prices. A similar process unfolded at the small end of the market, where practitioners needed to cut their fees to avoid losing their customers either to competitors or to do-it-yourself software packages. Today pressure on prices still continues throughout the industry.

What was once a cushy tax-and-audit monopoly has become a low-growth commodity. "That's had major ramifications on career paths, compensation, and investments within all the large firms," says Bob Nason, the executive partner and chief executive officer of Grant Thornton, the United States' seventh-largest accounting firm. "From the point of view of top management--present company included--we've all spent a lot of time looking at that trend and strategizing."

Putting accounting angst aside, the havoc within the profession adds up to great news for company builders. Competitive pressures are forcing accountants to upgrade their skills, lower their prices, and, best of all, redesign the ways they serve business customers. As a result, there's never been a better time to shop for the best accounting services at the best prices.

The Big Six

The nation's largest accounting firms--the so-called Big Six--dominate the industry. Known as the Big Eight until they carried out a series of megamergers and acquisitions during the 1980s, these goliaths now range in size from $4.5-billion Arthur Andersen to $2-billion Price Waterhouse. As a whole, the Big Six represent nearly half of the accounting world's total revenues in the United States. (See "How Big Are the Big Six?" below.)

During the early 1990s conditions seemed bleak for the Big Six. Not only were prices dropping on audits; lawsuits were increasing so quickly that audit work began to seem like a pure lose-lose proposition. Some firms, most notably KPMG Peat Marwick, had to downsize. Others switched leadership teams. Meanwhile, many of those once-publicized efforts to boost growth by branching into the entrepreneurial market just fizzled out. Three of the firms--Peat Marwick, Price Waterhouse, and Deloitte & Touche--seem to have made strategic decisions to retrench entirely.

But within the last few years, most of the Big Six appear to have found their salvation in the form of management-consulting services. (See "Forget the Number Crunching," below.) During 1995 alone, consulting revenues grew by an average of 30.8% at the Big Six firms. "That's more than 15 times faster than their accounting and auditing services grew," reports Bowman.

One sign of the times: Chicago-based Arthur Andersen split off its large-client consulting business into a separate division, Andersen Consulting. Next, as the gossip hot line has it, that consulting business--or a similar branch of another Big Six firm--may try to launch the accounting industry's first-ever initial public offering. (Firms are searching for ways to expand their capital base, to help partners cash out and to raise money for marketing and new technology. Accountants have traditionally had a hard time raising capital, with partners generally limited to their personal savings and borrowing power.) Even within Andersen's Enterprise Group, whose clients' revenues range from $5 million to $100 million, expectations are that the consulting line will grow from bringing in 30% of revenues to 50%.

The Big Six are always looking for ways to push customers in the direction of their consulting services. One tactic: accountants identify a company's problems during an audit and then aim to solve those problems with the help of the consultants. That process may provide the answer to your problems, but expect to pay a hefty price for it.

Other changes within the Big Six reflect their search for high-profit businesses. Coopers & Lybrand, for example, recently registered with the Securities & Exchange Commission to become a broker-dealer. KPMG Peat Marwick set up a short-lived strategic alliance with an investment bank so it could sell commission-based products. Ernst & Young gave birth to "Ernie," an Internet consulting service aimed at small-business customers.

"Rumor has it that Merrill Lynch is interested in buying a large national firm, maybe even one of the Big Six," says Ed Ketz, an associate professor of accounting at Penn State's Smeal College of Business, in State College, Pa. He adds, "They've refused to comment, but if the rumor is true, it opens up all kinds of questions--including how Merrill Lynch, or any brokerage firm, could control its certified public accountants, since those CPAs would also be auditing public companies whose stock their own company might be selling." But whether or not the Big Six reconfigure themselves one more time, one thing is certain: their management strategies have changed forever.

In a changing accounting universe, where the biggest transformations are undoubtedly taking place among the Big Six firms, there are lessons for potential customers. If you take your business to one of those firms, be prepared for a heavy push into consulting services, which your company may or may not need. Because of the litigation explosion, be prepared to be checked out very thoroughly. Most important of all, perhaps, investigate what's available within the other tiers of the accounting industry, because not only are the Big Six expensive, but there are many niches they no longer care to fill, such as serving audit-only customers with no plans for growth.

The Middle Tier

The middle segment of the accounting industry is a loose category of about 100 firms. A few boast national practices, while the rest possess strong regional client bases. Their revenues run the gamut from a little less than $10 million up to about $270 million. The one characteristic many of those firms have in common is that they serve the world of privately held companies.

The larger firms in this tier have gone global. For smaller accounting firms without the resources or the manpower to run international operations, networking is becoming an increasingly popular solution. Consider M.R. Weiser, for example. This New York City­based firm, with 22 accounting partners of its own, joined an international association to boost its international prowess. Known as Moores Rowland International, the association consists of 128 U.S.- and foreign-based accounting firms. With practices located in nearly 80 countries, the network now counts as one of the world's 10 largest accounting groups.

Midtier firms are experimenting with several variants on the networking theme. Boulay, Heutmaker, Zibell & Co., a 90-person firm based in Minneapolis, joined a team of local experts recently to launch a "virtual corporation group," to which clients can outsource a variety of administrative and management services. (They include business management, computer networking, software and facilities-management services, and others. Each service provider is an independent company.) Similarly, accounting networks can also help smaller midtier firms boost their expertise on the minutiae of state and local tax issues when their clients need help with matters outside their region.

Two major pressures on midtier firms--for enhanced technology and increased capital--have helped fuel the biggest networking trend that's taking place within the accounting profession: one being carried out by American Express's Tax and Business Services division. Put simply, American Express has spent the past few years quietly buying up local accounting firms, with the goal of building a national CPA network. While it may not ever grow to the point of rivaling the Big Six, it adds a fierce competitor to the profession's midtier, one with a household name. Equally important, its prices for comprehensive services are much more affordable that those of the Big Six and are right in line with its midtier competition's.

Technology is one of AmEx's big selling points when it approaches CPA firms after targeting a city for expansion. "We've invested a great deal in the technology here, and we're prepared to share our resources with the firms that join us. Within a week or so of acquiring a new firm, we send a technology team to its offices and can, right off the bat, speed up processing within its system by 30%," says Bob Basten, president and chief executive of the Minneapolis-based division.

American Express's activities are deemed revolutionary. Art Bowman explains: "It is a public company investing in an accounting firm--although it does that through a very complicated corporate structure because it has to comply with the various state rules against nonaccountants' owning accounting firms." The accounting boards of two states, Florida and Texas, have challenged AmEx's activities. (While the Texas lawsuit was still pending at press time, Florida recently lost in its effort to prevent AmEx's accountants from marketing themselves as CPAs. The state wanted to bar them from that simply because they were part of the corporation's team--even though they met all state requirements.) So far, the other 20 or so states in which AmEx's CPAs operate have given their tacit approval by simply not challenging the company.

It would be a mistake to dismiss AmEx's maneuvers as a lot of mumbo jumbo with little relevance for anyone other than CPAs. Where American Express goes, other financial-service supermarkets are sure to follow--and shopping for accounting services may never be the same again.

For entrepreneurial companies, the lessons are clear. If you don't plan to go public, you probably don't need a Big Six accounting firm. But if you're choosing a midtier firm, make certain it possesses the internal expertise or the networking capacity to handle your company's national and international needs.

You can't always assume, of course, that an accounting firm will be able to handle your fast-growing company's needs just because it belongs to a network. You'll want to know how the network adds to the firm's qualifications, the areas in which you'll be dealing with network accountants rather than your own, and the qualifications of the firms that belong to the network. (Beware of cases in which any firm that wants to join up can do so.) You'll want answers to specific questions that pertain to your business: How will the firm's network affiliation help your company with tax, strategic management, or accounting issues that crop up in the geographic areas in which you do business? How can the network help you grow in areas that are crucial to your growth plans?

Even if you go with an accounting firm that has access to top-quality technology and network support on complicated tax and international issues, that's no guarantee you won't outgrow the company when, for example, you have to raise capital from the public or private markets. You're probably better off starting with a firm that's hooked up to a network, but you do have to keep evaluating your accounting needs. Above all else, be sure to shop for the best package, considering price, accounting expertise, and other services. Thanks to pressures from AmEx, the Big Six, and others, you'll have lots of choices.

Small Practitioners

While nobody knows the exact number for sure, there may be as many as 450,000 accountants practicing at small or solo firms across the United States. Some will undoubtedly be squeezed out of business because they can't keep up with the competition or meet growing capital or technological needs. But many others have responded to trends within their industry by giving new meaning to specialization or customer service. Those are the accountants who believe they have more to offer to their customers than the Big Six firms, where many gained their early experience.

Discount corporate-tax services are a natural for CPAs. But who could have imagined profitable niches in accounting for farmer-owned cooperatives, equine businesses, or child-care providers? "I think we'll see more and more small firms targeting special niches, or skill specialties, or even certain population groups," predicts Suzanne Verity, executive editor of Public Accounting Report, a biweekly newsletter. "In a world of intense competition, everybody's looking for ways to drum up and hold on to their customers."

That means it's likelier that a firm has either specialized in your industry or acquired some expertise in it. It also means you can shop around for different accounting services. When dealing with specialty firms, you can also often cut costs and enhance quality by unbundling your accounting services. Depending on your company's needs and internal capabilities, that might mean handling billing, collection, and accounts payable internally, and outsourcing your payroll, hiring a tax specialist to handle IRS and state filings, and then, as your company grows, contracting for a part-time chief financial officer. (See "A Shopper's World," below.)

Listen to Richard Colombik, a CPA and lawyer who left the Big Eight behind him to run a small firm that has 10 professionals working out of six Illinois locations. "I've concluded," says Colombik, from his office in Schaumburg, a suburb of Chicago, "that some smaller-business owners don't want to drive more than 15 minutes when they're meeting with their tax lawyer. So every time I build up a new core of business, we open a new office close to our customers. That's one of the ways that I feel we can be more flexible and more receptive to our clients' needs than a larger firm would be."

Can the smallest accounting firms survive the competitive onslaught they face from large firms and the burgeoning networks? "I believe there will always be a place for the small accounting firms, so long as they're willing to professionalize and stay on top of the explosion of information technology," comments F. David Fowler, a former KPMG Peat Marwick partner who is now dean of the School of Business and Public Management at George Washington University, in Washington, D.C.

"When someone sitting next to me on a plane asks me what I do, I usually tell him or her I'm a salesman," says Ron Silberstein of Hirsch & Silberstein, a four-CPA firm based in Farmington Hills, Mich. "Then they ask, 'What do you sell?' and I tell them, 'Accounting services." He laughs. "In the old days, you could manage just fine as an accountant, sitting at your desk, crunching all those numbers. You didn't have to worry about people skills or selling your firm. Those days are over."

But if the changes within accounting firms have been largely positive for their customers, there are some risks as well. The biggest of those risks concerns a shift within the profession's ethical guidelines, as set by the American Institute of Certified Public Accountants. Accounting firms can now sell commission-based products--including investments, insurance, and the like--so long as they disclose their cut to customers and do it through the establishment of a separate subsidiary. Given their potential profits from doing consulting work, the Big Six have less incentive to move in that direction than midsize and small firms do. For those firms--especially the ones that have yet to find a profitable specialty niche--investment fees might well look too enticing to resist.

"The dilemma for the accounting industry is, Will it taint their clients' perception of their independence and trustworthiness if they influence decisions to make purchases that will also earn them fees?" asks Jay Nisberg, a consultant to the industry who's based in Ridgefield, Conn. So far, that's a call many accounting firms don't know how to make. So most are sitting on the sidelines. Here again, American Express's involvement complicates matters, since that company will undoubtedly try to hawk products to its accountants' customers.

The outcome of many of these trends is still far from clear. But for the consumers of accounting services at this end of the market, there's simply no ambiguity: this is a buyer's market.

What does all the brouhaha within the accounting profession mean for the owners of small and fast-growing companies?

For an answer, take a peek at Sportsheets International, a Costa Mesa, Calif., manufacturer and distributor of adult novelties, with projected 1997 sales of about $700,000. The company's president, Tom Stewart, founded the business four years ago in partnership with his brother Bob, who's vice-president. Tom and Bob's sister Julie is the director of business operations. The three ran Sportsheets out of their home until just last year.

"We went to a big local accounting firm and hired a team to come out and take a look at our business," Tom says. "But all they wanted to do was crunch numbers, and the main thing they told us was, we didn't have enough numbers for them to crunch. The implication was, call them when we had some more numbers."

Then Julie followed up on a flyer from a local accountant, Donna McGovern, whose Westminster, Calif., consulting firm, Ideal Business Solutions, promised custom-designed financial services at affordable prices.

With McGovern's assistance, the Stewarts have put together a financial team at a price range and level of service that fits their business to a T. Years ago, companies this small never could have split their accounting business into multiple, smaller accounts and then scanned the marketplace for specialists to satisfy each need. "The users of accounting services are getting much smarter," says McGovern. "Small and big companies can now shop around for exactly the expert they want. And if someone is an expert in Service A but not in Service B--well, they can shop around and find that person, too."

And it's working for the Stewarts. "We hire Donna to come in two or three days each month to help us with our closing, kind of like a part-time chief financial officer," Julie explains. "Her responsibilities include compiling our monthly financial reports and analyzing our cost of goods--something we never knew how to do before. She also helps us with business plans for new projects we're considering." Julie, with the help of a financial clerk, handles Sportsheets' accounts-receivable and -payable operations. That clamps costs down, while keeping her abreast of the company's day-to-day financials. About once a month the company brings in its outside CPA to handle its corporate-income-tax work as well as some tax planning.

"I look back on the time before we had both of them as a dark period, when everything was in a flurry of product in, product out, and we never really knew if we were making any money," says Tom.

Forget the Number Crunching

Where's the growth taking place in large accounting firms? According to Public Accounting Report's survey of the nine national accounting firms in the United States, the growth in management-consulting services dwarfed that of accounting and auditing and taxes.

1995 revenues (in millions)

% change since 1990

Accounting and auditing

$6,004

+2.9%

Taxes

$3,197

+13.1%

Management-consulting services

$6,371

+117.7%

Source: Public Accounting Report, Atlanta, August 1996.

The New Accountants

Believe it or not, some accountants thrive on change. Take Stephen King, a CPA refugee from Ernst & Young, whose activities would probably thrill and chill more accountants than the books of his novel-writing namesake would.

His business plan originated with one horrific vision: "Small-business owners hated their accountants, who were either too big to pay enough attention to them or too small to serve all their needs." So King, whose rÃ‰sumÃ‰ includes a stint as the chief financial officer of Amnesty International USA, created a New York City­based accounting firm called Virtual Growth Inc.

"We're attempting to redefine accounting services for small businesses," King says, "by putting together a network of small local accountants who together are part of a big data center. We supplement their expertise and their technology with our own. And together, we can offer our clients everything from advanced accounting-system design and strategic business planning, to the outsourcing of bookkeeping or other financial services, to sophisticated tax preparation and planning, and more."

Here's how it works: A small-business owner goes to a local accountant who's part of the Virtual Growth network. When his or her accounting needs exceed that local practitioner's expertise, the owner calls on other accountants in the network, usually by computer or telephone. For business clients who don't need on-site hand-holding, all accounting needs can be serviced by specialists assigned from the network.

The Internet plays an important role in King's business plan. "We're prepared to function as a company's virtual chief financial officer as well as its virtual accounting department." In such cases, clients transmit financial results weekly or biweekly, including new sales, invoices, and the like, by computer to Virtual Growth's headquarters. "Then they can download anything they want from within their data file anytime, which means they have access to financial information 24 hours a day--which is much more than most growing companies can say now," King says.

Just one year old, Virtual Growth already has 12 accountants and two M.B.A.'s in the network and more than 80 corporate clients.

Where the Jobs Are

Accountants are difficult to categorize into the three tiers partly because accounting licenses and other trends are tracked by state and are not uniform. Here's one estimate of how the profession stacks up:

Of the roughly 525,000 accountants licensed by the National Association of State Boards of Accountancy...

Source: Public Accounting Report, Atlanta, August 1996.

79% were solo practitioners or were employed by small firms (those with less than $8.5 million in net revenues)